Remember Jake from State Farm? Here's the whole story.
The high cost of auto insurance is a plague negatively impacting U.S. drivers throughout the nation. So it’s not surprising that Washington D.C. residents are yet another community frustrated by expensive vehicle insurance premiums. As a result, D.C. Department of Insurance, Securities and Banking (DISB) Commissioner, Stephen Taylor, held a public hearing earlier this year to review auto insurance pricing and standard rating practices within the District.
During the March 2019 DISB meeting, the Consumer Federation of America (CFA) testified to the need for regulations protecting consumers from high-priced automobile insurance. The CFA pointed out the burden of pricey plans is particularly heavy for lower-income households.
Robert Hunter, Director of Insurance for CFA, further testified as to how widespread the practice of unaffordable car insurance actually is within the District. Hunter’s contribution to the DISB hearing is important since CFA has spent the last 50 years protecting consumer interest through advocacy, research, and education.
Hunter cited information published by the Federal Insurance Office (a division of the U.S. Department of Treasury) stating that three D.C. zip codes have an average insurance rate that is unaffordable to its drivers.
What this boils down to is about 140,000 residents (20% of all residents) in the District are charged unaffordable rates.
Hunter went on to testify to the importance of the District finally and completely addressing the affordability of auto coverage through several different reforms:
- Provide incentives for loss reduction and safe driving by basing the pricing on factors such as annual miles driven and motor vehicle records.
- Establishing a “prior approval” approach to developing rates. This would mean insurance carriers must justify their proposed rate hikes to DISB before actually implementing the changes.
- Creating a low-cost auto insurance plan for lower-income drivers.
Expensive Car Insurance Hits Low Income Households Hardest
For many low-income D.C. households, the vehicle itself isn’t the biggest obstacle to becoming mobile. It’s actually the high auto insurance premiums that become the biggest hurdle to getting on the road. After all, for families with tight budgets, the expense of mandated vehicle coverage places an even bigger burden on their financial resources.
If drivers aren’t able to afford the high costs associated with D.C. auto policies, then the driver and his/her household miss out on the ability to get to work, to school, to discount retailers, to doctors, to church, and too many other personal and professional activities. Hunter pointed out to DISB that some residents are actually faced with a choice between paying for car insurance and feeding their family.
In fact, 2016 statistics published by the Insurance Research Council (IRC) confirm Hunter’s anecdote. The premiere U.S. property-casualty insurance research organization, IRC, estimated 15.6 percent of District citizens drive without car insurance. This is exceeds the nationwide average of 13 percent. IRC further advised that a large portion of D.C. residents just don’t drive at all because of expensive auto policies. Either scenario puts D.C. drivers in a bad spot by limiting their lifestyle and their opportunities.
Many D.C. drivers feel they have no choice but to skip the pricey insurance altogether and drive with the hopes of not being involved in an accident or being pulled-over by police. Of course, this is a huge risk for lower income families because either scenario would end-up costing them quite a bit financially.
As Hunter pointed out during the DISB hearing, District penalties for operating a vehicle without proper auto coverage is exorbitant. In fact, the driver could face as much as $2,530 in sanctions. Hunter broke down the costs as follows: $30 fine for not being able to show proof of current insurance, suspension of registration tags, a $150 fine for a 30 day (or less) lapse in coverage or $7 per day for lapses over 30 days (all the way up to a maximum of $2,500).
These penalties could be devastating to a lower income household. So why aren’t D.C. residents given the choice of more reasonable rates?
Ratings Formulas Discriminate Against Lower Income Drivers
Hunter testified that insureds are judged by who they are and not how they drive. He further advised the D.C. Commissioner that good, low-income drivers can’t pay for an auto policy that’s based on unfair pricing.
The 2015 auto insurance study conducted by CFA supports Hunter’s evaluation. CFA’s research revealed a number of specific ways consumers are being unfairly discriminated against, including:
- Drivers with poor credit, maybe because they live paycheck-to-paycheck, pay more premium
- Drivers with lower-paying jobs, pay more premium
- Women receive a “widow penalty” (or premium surcharge) when their husband passes away. According to the CFA study, this penalty can be as much as 20 percent.
- Drivers with less education pay more than those with college degrees
- Drivers who rent their residence rather than own, are divorced or single, had a lapse in auto insurance, or were previously insured by a non-standard insurance company will all pay more.
In all these scenarios, the socio-economic factors had more influence over pricing than the actual motor vehicle record. This means a wealthy person with multiple accidents or tickets still pays less than an excellent driver that meets only one of the above descriptions.
Big Data and Artificial Intelligence Negatively Influence Auto Rates Too
During the DISB hearing, Hunter also expressed CFA’s concerns over insurance companies’ growing use of pricing models based on “Big Data” and Artificial Intelligence (AI). In fact, Hunter referenced research by Anya Prince and Daniel Schwarz, both Midwest law professors, warning that “proxy discrimination” generated by AI can potentially cause unintentional, yet significant, economic and social harm to consumers.
CFA called for DISB to change its current anti-discrimination laws to prevent insurance carriers form using Big Data and AI to purposely, or even inadvertently, discriminate against consumers.
Recommendations for Changes to D.C. Auto Insurance Market
During the District hearing, Hunter provided two recommendations for lowering D.C. auto insurance plans. First, the D.C. Insurance Commissioner should eliminate the use of any socio-economic components of a driver’s life to influence their car insurance. Instead CFA encourages insurers to make driving records, miles driven annually, and years of driving experience as the most critical rating factors.
Second, CFA called upon D.C. to implement “low income, good driver” programs similar to those of New Jersey and California. In New Jersey, residents have access to the “Special Automobile Insurance Policy (SAIP)” which helps make medical-only auto insurance available to individuals who are already eligible for Federal Medicaid. The New Jersey program costs $365 per year (breaking down to $30.41 per month). In the Golden State, drivers have been able to access California’s “Low Cost Automobile Program (CLCA)” since 1999. The CLCA program makes an auto liability policy available for an average annual base rate in the mid-$200s, with pricing variances among counties.